Facebook Misjudged Demand in IPO, Wedbush’s Pachter Says

It was the company’s failure to gauge demand -- and not
concern over its growth prospects -- that caused the stock to
sink 18 percent in its first two days of trading, Pachter said
in an interview with Tom Keene on Bloomberg Radio.

Shares of the owner of the largest social-media site rose
3.2 percent to $32 at the close in New York. Facebook, based in
Menlo Park, California, began trading on May 18 after raising
$16 billion in the largest-ever technology IPO. Just before the
IPO, the company boosted the number of shares to be offered by
25 percent to 421.2 million.

The stock would have risen to $45 had Facebook sold fewer
shares, Pachter said.

“The guys who bought at $38 freaked out and you saw them
puking the stock because they didn’t know why it was going
down,” said Pachter, who has an outperform rating on the
shares, which he predicts will rise to $44. “There’s nothing
fundamentally different about Facebook today from the night they
priced it.”

Investors have failed to understand that Facebook’s growth
is tied to its ability to get more money from advertisers -- not
whether it can attract more users, Pachter said.

Real Growth

“The problem for investors is that nobody really
understands how Facebook intends to monetize its user base,” he
said. “The real growth is in delivering more relevant ads and
charging more for them.”

Investors are overly concerned that Facebook hasn’t made
enough progress in mobile advertising and hasn’t won enough
users in markets outside North America and Western Europe,
Pachter said.

The company’s earnings growth will track the amount of time
users spend on its site, according to Martin. About 14 percent
of time Internet users spend online is on Facebook, indicating
that its global potential revenue is about $14 billion, she
wrote in a research note published today.

The increase in its operating margins -- to 47.3 percent of
sales in 2011 -- suggests that its profit will grow faster than
revenue, she wrote. Martin estimates the stock will rise to $40.

“When he turns up in a hoodie he’s saying: I don’t care
about you, I care about my users,” Pachter said. “If the users
were the people that pay Facebook, then investors and the
hoodie-man would be entirely aligned.”